Bogus GDP, Inflation Figures Can’t Stop Falling US Stock Market

Ai yi yi… Last Friday, it looked like what was going to happen to Nigeria was already happening to the US stock market.

Nigeria is our neighbor’s prize bull. He’s going to be slaughtered, because he’s getting old and is no longer earning his keep.

This bull market on Wall Street, such as it is, is getting old too. And yesterday, the butchers were sharpening their knives.

The Dow fell hard – down 362 points. Why?

Commentators said investors were disappointed with the measly quarter point rate cut delivered by the Bernanke Fed on Wednesday. What? How could that be? Nine out of ten economists saw it coming. Why would investors have such surprised looks on their faces?

Maybe it is because the Fed signalled that there were not a lot more rate cuts where this one came from. But who would believe that?

Nah, dear reader, the explanations don’t make much sense. But why bother looking for a reason? All bulls get slaughtered – sooner or later. That’s just the way it works.

As stocks went down, both gold and oil lost a little ground…but not much. Oil is still over US$93. The price of gold is over US$793.

Which brings us back to numbers – we have become suspicious of them. There are only ten basic digits…but just look at them. Since we gave up Roman numerals, our numbers aren’t straight. Who can trust the number 5, for example? The squiggly little humbug! It is crooked. It has a straight bar across the top, which makes it appear on the up and up…but then it stabs down and then hooks around to the bottom. Very devious.

Still, when they are on their own, numbers – like men – seem to be fairly reliable and decent. You have one dollar. We have three chickens. The team scored nine runs. But mix ‘em and match ‘em…put ‘em in a crowd …and you can get any combination and any scammy result you want.

We mentioned last week that after the feds got finished scrambling the GDP numbers, they revealed growth of precisely 3.9% per year. We pointed out that “growth” itself doesn’t mean much. Life imitates academia; we begin to act like dead economists say we should act. The professors tell us that digits are important. The next thing you know people are worrying about their cholesterol count and their return on investment. Not only that, but they’re putting their wives to work in order to increase the digits in their household incomes…and watching the Fed to see what it will do with the digits in short-term interest rates.

And lo! Their interest in digits…in making money and spending it…causes the digits in the GDP to go up. Instead of cutting their own lawns or baking their own cookies, our new digitally-enhanced citizens pay someone else to do these things so they can spend their own time making more digital money.

Ah yes…dear reader…we’ve come to that. Even those ‘paper’ dollars are often not even paper. They are computer fantasies. Your bank tells you that you have a certain number of dollars in your account. You take it for granted that the dollars are there. But there are no dollars…just a spectral trace of dollars in digital form.

So, you tell someone that you have 10 dollars and 22 cents. What do you have? Ten what? It sounds precise…but the precision is as much a fantasy as the money itself. You don’t know what you have. Maybe you have nothing at all…or something that could become nothing pretty darned fast. Ten dollars was what we earned for two days’ hard labour in the tobacco fields when we were 15 years old. Now, it is what we earn every five minutes. Yes, we are older and wiser…and people pay us more money today than they did 40 years ago. We’re not the same person we were then…and the money isn’t the same either. While we gained value in the workplace, our money lost value.

The feds say the inflation rate is less than 3%. How could inflation be running at less than 3% per year while prices on the most important things in commerce – food and energy – are increasing 10 times as fast? We don’t know; it’s one of the reasons we’ve lost faith in digits. They lie.

The only way the feds could get the inflation rate down was by smashing it on the head. And guess what happened? The GDP rate popped up. Yes, dear reader, real output is calculated by subtracting the inflation rate from nominal output. The lower the inflation rate, the higher the GDP number. So, if you can beat down the inflation number, that GDP number will get bigger. Neat, huh?

John Crudele, writing in the New York Post :

“The trouble is, the GDP only grew that much because the government somehow manufactured a big drop in inflation.

“According to the Commerce Department report, inflation was only 0.8 percent in the third quarter.

“When you look at real economic growth – meaning, after inflation – every tick down in inflation causes a tick up in economic growth.

“The rate of inflation was 2.6 percent in the second quarter of 2007 and 4.2 percent in this year’s first quarter. Wall Street was expecting 2 percent inflation this time.

“Inflation at a slow 0.8 percent rate would certainly be welcome – if only it were credible.

“But even less believable is the fact that the inflation rate nose-dived at the same time oil prices were heading toward US$90 a barrel – which it now exceeds.

“So, in reality, economic growth is probably much slower than is being reported. And inflation is a lot higher.”

We’re convinced; reality and digits don’t hang together anymore. Maybe they never did.

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.

Dammit Bill, you started to make me paranoid about my ‘digits’ in the bank!

Vote Up

0

Vote Down Reply

9 years 1 month ago

Letters will be edited for clarity, punctuation, spelling and length.
Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au

Follow us on

Testimonial

Just thought I would let you know that whilst I receive countless financial emails daily I view yours as something special. I am not looking for the same old humdrum I am looking for news that is out of left field. Now you guys would be off the planet if you went any further left but it is refreshingly different. I get through the humdrum first and get my mind sorted and save you for last as a check. It is certainly an insane moment in time but I am still finding investment opportunities. Thanks for your comments